02 Jun Is Your Business Overvalued? Finding Its True Market Worth
Q&A with David & Jay
Question: Overvalued business or True Market Value
Most owners have an idea what they think their business is worth. How do you handle a situation where a business owner has overvalued their business.
Answer:
This is a complex question and often has root in some level of misunderstanding.
A trade journal makes a comment that a particular owner sold his interest for a certain multiple of earnings. It makes for an interesting story or headline and is likely a true statement. However, what is often not stated is what version of earnings was used. (After tax earnings, before tax earnings, normalized earnings, EBITDA, Seller discretionary earnings, etc.)
- The first step is education. Data which shows how the subject business compares to other similar sold businesses. Compare their earnings, revenues, margins, growth, etc.
- The second approach is to ask the seller how much they would pay to purchase a competitor similar in size. It is often interesting to hear how they feel their business has little risk, but buying the competitor is fraught with downside.
Both of these exercises help a seller understand value in the marketplace. It can also drive a seller to set a value goal and to reinvest time, energy and capital into the business to achieve their goals.
The Takeaway:
Business owners often overvalue their companies because they misunderstand which earnings metrics are used in flashy M&A headlines. The best way to ground their expectations is through market education—comparing their data to recently sold businesses and challenging them to evaluate a competitor from a buyer’s perspective—which helps them set realistic goals and reinvest their efforts effectively.
During the 2025 Managing and Accounting Practice (MAP) Conference hosted by the Massachusetts Society of CPAs (MassCPAs), Beacon Equity Advisors’ David Humphrey and Jay Galasso presented an AMA (Ask Me Anything) to the CPA firm partners attending. In this Q&A series, Beacon publishes some of those questions to help business owners make important decisions about the future of their company.